.PIA unfinished business lingers
The Nigerian oil and gas sector, once reputed for Joint Ventures (JVs) and Production Sharing Contracts (PSCs), has seen a notable decline in output and investment in recent years, raising the alarm bells for a nation heavily reliant on crude oil exports for its foreign exchange (FX) inflows.
Latest data from the Nigeria Extractive Industries Transparency Initiative (NEITI), a transparency watchdog, showed that there was about a 30 to 35 percent drop in Nigeria’s JV and PSC operations from 2013 to 2023.
JVs and PSCs are considered key pillars of its oil and gas sector.
“The biggest issue we face today is the decline rate in PSC operations, which used to be a sizable chunk of Nigeria’s oil output due to lack of quality investments,” a senior oil executive exposed to Nigeria’s upstream business told BusinessDay.
“If no decision is taken today or over the next three years, I don’t know what we will be left with in terms of PSC production. The development is also the same for JV production.”
The PSC is a form of joint agreement for exploration, development and production of oil resources, where extractive companies bear the cost of production. It is unlike the JV agreement where the government is indebted with cash calls.
In 2014, the volume of production from JVs stood at 396.8 million barrels, while PSCs produced 320.2 million barrels annually. Since then, both segments have shown persistent downward trends. By 2023, JV production had fallen to 257 million barrels, a decrease of nearly 35 percent from 2014 levels.
Similarly, PSCs recorded a drop from 320.2 million barrels in 2014 to 207.2 million barrels in 2023, a 35 percent decline as well.
“We cannot continue to dream of a better country when we don’t know how to optimise our national resources,” Olusegun Omisakin, director of research and chief economist at the Nigeria Economic Summit Group, said at a quarterly macro-economic outlook webinar monitored by BusinessDay.
Bolaji Ogundare, group executive director of Newcross Group and Pan Ocean Oil Corporation (Nigeria), in a recent interview, told BusinessDay that the future of Nigeria’s oil industry rests on investing in exploration.
“Investing in exploration is crucial for future growth and because it is risky and expensive. For exploration to take place, most companies need more incentives to do true exploration because, as we know, they are very high-risk and highly capital-intensive with million-dollar investments,” Ogundare said.
He added, “Achieving two million barrels, or better still 2.6 mbd of oil production, requires a long-term perspective, not just a short-term sprint that cannot be sustained year on year.”
Data sourced from NEITI showed the JV model, in particular, has seen investments and production volumes decline since 2014. In 2015, JV output slipped to 375.5 million barrels and continued on a downward trajectory through the decade.
The sharpest decline came in 2020 when JV production dropped to 271.4 million barrels as the global oil market grappled with the COVID-19 pandemic, with disruptions and a slump in demand further exacerbating domestic challenges.
The PSC model, on the other hand, initially appeared more resilient. In 2015, PSC production rose slightly to 320.6 million barrels from 320.2 million in 2014.
However, PSC volumes began to decline by 2018, falling to 270.6 million barrels and continuing to contract year-on-year, landing at 207.2 million barrels in 2023.
“The revenue implication for Nigeria is that the government’s take will fall further, as it exits the JVs and retains unfavourable PSCs terms which give the bulk of crude earnings to international oil companies (IOCs) who assume production risks in deep waters,” Tonye Monye, a senior risk analyst at a Lagos-based investment house, said.
Other experts said the PSC and JV production decline underscores persistent challenges and lingering uncertainties around the full implementation of the Petroleum Industry Act (PIA).
Experts surveyed by BusinessDay said these declines highlight the struggles of Nigeria’s oil and gas industry amid global competition for investment, regulatory challenges, and delayed structural reforms under the PIA.
The PIA, which aims to streamline the oil industry by addressing regulatory bottlenecks and introducing favourable terms to attract investment, was signed into law in 2021 but remains partially implemented as issues surrounding NNPC competitiveness, regulatory efficiency and acreage management linger.
“The Nigerian oil and gas Industry is in dire need of investments to revitalise the sector, with international oil companies (IOCs) divesting from onshore and shallow water assets and concentrating their efforts on deepwater operations,” said KPMG, a British multinational professional services network, and one of the ‘Big Four’ accounting organisations, along with Ernst & Young, Deloitte, and PwC.
In May 2023, the Oil and Gas Sub-committee of the Presidential Advisory Council of President Bola Tinubu had set performance targets for the country by 2030, with the aspiration to raise oil production to 4 million barrels per day and gas to 12bcf per day.
Following these ambitious targets, the federal government issued three Executive Orders in February 2024 and in October issued additional fiscal incentives for oil and gas production.
They include: Value Added Tax (VAT) Modification Order 2024 as well as Notice of Tax Incentives for Deep Offshore Oil & Gas Production (Tax Incentives, Exemption, Remission, etc.) Order 2024.
In its analysis, KPMG argued that the decision to cap the hydrocarbon liquid content of a gas field to 100 barrels per million standard cubic feet (mmscf) was commendable.
The world-renowned consultancy firm explained that this would help to develop fields with lower liquid content, thereby making them more economically viable.
“While this is commendable, it is essential to ensure that the benchmark price remains competitive for operators in the sector if it considers the unique challenges faced by Nigerian oil and gas producers, such as security cost, bureaucracy, excessive regulatory oversight,” KPMG added.
Besides, it stressed that it was a welcome development that the government had reintroduced tax credits, rather than the production allowances, contained in the Petroleum Industry Act (PIA).
“Undoubtedly, tax credits have a more significant impact than production allowances given that operators can claim 100 per cent deduction from the tax liabilities due, unlike production allowances whose impact is limited to the applicable tax rate.
“Under the PIA, Production Sharing Contracts (PSC) operators involved in deep offshore gas production cannot claim the production allowances as the allowances are limited to hydrocarbon liquids crude oil, condensates, and natural gas liquids.
“Even then, the operators are unable to utilise the allowances since they are only subject to companies income tax and there is no provision for the deduction of production allowances under the Companies Income Tax Act,” it explained in the review of the new oil and gas incentives.
However, it pointed out that the jury was still out on whether the incentive package was competitive enough to ignite the expected reaction from investors, as businessmen will only invest where there is an expectation of high returns on their investment.
“Consequently, all potential projects will have to be evaluated in terms of the rate of return they generate. The government will need to monitor the response of investors on a periodic basis and make the necessary adjustments when needed given the competitive landscape for oil and gas projects,” it stressed.
